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Rado Dwight is a manager of the telemarketing call center agency, Clean Telemarketers, Inc. As is common with business process outsourcing, Clean Telemarketers services deal with different types of clients. One of the newest units in the team is the personal hygiene team which opened its doors selling Fresh Shampoo, a famous brand of the biggest international personal hygiene corporations UniGamble.
From the time it started in the first quarter of 2012, Clean Telemarketers has given an outstanding performance in selling Fresh Shampoo . What is more, UniGamble has now offered a contract to sell another product Soothing Soap.
Rado is very much delighted to receive this contract, but he faces a few challenging questions now. Firstly, given that the profitability of the personal hygiene team is already very high, does he take the contract to sell another product? Secondly, if he decides to take the contract, what would be the allocated number of calls that should be dedicated to each product?
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The manager gathers some facts. From the contract with UniGamble, he knows that the revenues earned from selling each unit of Fresh Shampoo is $2 and for Soothing Soap is $1. The number of seats in the personal hygiene team is also constant and involves 100 seats, which means that the team’s total cost is constant. UniGamble also employs many other call center agencies, which means Rado can opt to allocate whichever way he wants. He can opt to allocate 100% of resources to one product or none at all and it will not be an issue.
From this limited data, Rado concludes the following: when earning fewer revenues per unit of Soothing Shampoo and do not change the team’s size, the team’s profitability will be harmed if they sell the new product. From here, Rado decides to reject the contract and continue to allocate 100% of the team’s capacity to Fresh Shampoo.
Rado goes to his boss and the president, Jana Saunders and presents his recommendation. Did he make the right recommendation? Jana is skeptical and asks Rado for further evaluation.
Economic Model: Profit Maximization for the Monopolistic Firm
As the owner of Clean Telemarketers, Jana’s main goal and criteria is profit maximization. Knowing that resources are not unlimited, any firm should ensure that the resources are used up in the most optimal way possible in terms of profits. To analyze the case, we consider Clean Telemarketers as a monopoly, with absolutely no pressure on pricing (as this is based on a contracted price) and no apparent pressures on demand.
Firstly, the costs and revenues associated per unit of each product sold should be considered, denoted as follows: CostFS, RevenueFS, and ProfitFS for Fresh Shampoo and CostSS, RevenueSS, and ProfitSS for Soothing Soap. If the total units produced for Fresh Shampoo and Soothing Soap are UnitsFS and UnitsSS, then the total profit of the personal hygiene team is:
Total Actual Profit = [UnitsFS * (RevenueFS – CostFS)] + [UnitsSS * (RevenueSS – CostSS)]
= (UnitsFS * ProfitFS) + (UnitsSS * ProfitSS)
As a first check, the calculation above should show us that each product is indeed profitable on a per unit basis. However, to ensure profit maximization in a more comprehensive manner, the company should consider not only actual profit, but also economic profit. Economic Profit is defined as:
Economic Profit = Revenues – (Explicit Costs + Implicit Costs)
With both explicit and implicit costs considered, Rado’s basis of allocation should be the allocation that maximizes the company’s total economic profit.
From the initial calculation of profit per unit, we can already see that even while revenues per unit are the same, more is earned from Soothing Soap because fewer minutes are spent in making a successful sale.
Soothing Soap Sensitivity
Clean Telemarketers is almost ready to accept the new contract from UniGamble with a capacity of 50 seats each for Fresh Shampoo and Soothing Soap. However, Jana would like to have a prudent approach to taking on a new product. The newly formed personal hygiene team had only started to offer Fresh Shampoo and their productivity on a second product may behave positively and negatively.
While the total economic profit does not change, total profit varies greatly with respect to changes in the number of minutes to make a successful sale of Soothing Soap. With only a change of 30 seconds to the base case of 3 minutes, total profit can increase or decrease by 35% or 25%. This shows that profit is very sensitive to the team’s average performance and productivity.
Taking into consideration the calculations above and barring any other restrictive factors, Rado’s final recommendation should be:
(1)Clean Marketers should be open to offer Soothing Shampoo given better profitability projections
(2)Given limited knowledge in the key performance indicators of Soothing Shampoo, to open its telemarketing as a test phase of 3 to 6 months
(3)In this period of time, Clean Telemarketers should closely monitor key performance indicators for both products and assess profitability as these KPIs change
(4)From this accumulated data, perform a similar analysis for economic profit maximization and recalibrate allocation, if needed.
Once there is comfort with steady levels of performance indicators and overall profitability, Clean Telemarketers can proceed to commit an optimal, profit-maximizing allocation through their contract with UniGamble.
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